Stay Afloat in the Wave of Changing Flood Zones

How a small mortgage transaction detail can create a huge, unnecessary risk.

As a homeowner, when your credit union’s mortgage department informs you the Federal Emergency Management Administration (FEMA) has reclassified your neighborhood as a flood zone—and that you must buy flood insurance—that’s bad news.

But if a flood destroys your home and you learn you were eligible for flood insurance—but your credit union never told you—that’s even worse.

Seven Things to Look for in a Flood Zone Determination Service

1. Affordability. You may save money in the short term by purchasing one-time-only flood zone determinations. But the risk for a credit union outweighs those few dollar savings.

If you opt for life-of-loan determinations, be sure you won’t be charged again if the loan is refinanced or the member takes out a home equity loan or line of credit.

2. Visibility. If the service can provide a satellite image of the property, overlaid with the FEMA flood zones, it should quickly identify whether a property close to the edge of a flood plain requires further review.

3. Versatility. Services that can plug seamlessly into your loan operating platform can largely automate the determination process. Otherwise, the service should also be able to respond via fax, phone, or e-mail.

4. Reliability. Make sure the service is certified by the National Flood Determination Association.

5. Availability. The service should have knowledgeable staff on call during the hours you conduct mortgage transactions (which may be before and after regular business hours).

6. Accountability. If home buyers, sellers, or their homeowners insurance providers dispute a flood zone determination, the service should have the in-house compliance expertise to double-check, verify, and explain a determination.

7. Durability. Look for an established, stable provider. The business has changed significantly in recent years, and many flood zone determination services have closed or merged with larger companies.

However, a property being reclassified as within a flood zone also affects the credit union as the loan originator and/or mortgagor. Lenders can be held liable for some or all flood damages if a flood zone determination hasn’t been properly executed.

Also, lenders that get flood zone determinations only at origination, and that don’t track changing flood zones for their properties, put their members and their bottom lines at unnecessary risk

Ken Twichell, senior vice president for LPS National Flood, warns credit unions against assuming their mortgage portfolios are safe from flood risks.

He points to two FEMA initiatives that have made it more critical than ever to secure continuously updated (“life-of-loan”) flood zone determinations:

1. Map Modernization Project. In 2007, FEMA began aggressively updating and digitizing its flood zone map “panels.” Each panel encompasses a specific area of a community, such as a city, town or county.

Twichell says the initiative has increased updates from 3,000 to 4,000 panels per year to 10,000 to 15,000 per year. By the time the project is done at the end of 2011, panels covering about 95% of the U.S. population will have been updated.

The sheer volume of updates means many properties that weren’t classified as being located in special flood hazard areas (SFHAs) when the properties’ mortgages were closed will be re-classified into an SFHA, where flood insurance is required.

2. Risk Map Project. FEMA has begun focusing heavily on assessing and mitigating flood risks of coastal areas and those protected by levees. Some levee systems are being altered to protect at-risk areas, but Twichell says some levee changes also increase the risk for areas that were relatively safe before.

“They’re finding many levees that aren’t in good states of repair,” he says. “The result will probably be many more homes in SFHA flood zones over the next two to four years.”

Value accuracy and compliance

Flood zone determination is one small detail in a complex mortgage transaction. Getting it wrong, however, can have serious consequences.

Insist on a flood zone determination service that has a track record of prompt determinations and timely updates over the life of the loan.

Also, request references from other lenders. Ask them whether the service quickly resolves questions or disputes that a homeowner or homeowners’ insurance company may raise regarding a determination.

Having the technology to accurately assess the location of a property is important, but so is personal service and expertise—the waters can occasionally get rough where FEMA and mortgage lending regulations converge.

But having the right lending partner to help you navigate these changes is key to smooth sailing.

The NCUA’s final field-of-membership rule was published Wednesday, making it effective Feb. 6. The rule, finalized by the NCUA board in October, facilitates consumer access to credit unions and provides credit unions with more flexibility.